Greece’s financial drama has dominated the headlines for five years for one reason: the stubborn refusal of our creditors to offer essential debt relief. Why, against common sense, against the IMF’s verdict and against the everyday practices of bankers facing stressed debtors, do they resist a debt restructure? The answer cannot be found in economics because it resides deep in Europe’s labyrinthine politics.

In 2010, the Greek state became insolvent. Two options consistent with continuing membership of the eurozone presented themselves: the sensible one, that any decent banker would recommend – restructuring the debt and reforming the economy; and the toxic option – extending new loans to a bankrupt entity while pretending that it remains solvent.

Official Europe chose the second option, putting the bailing out of French and German banks exposed to Greek public debt above Greece’s socioeconomic viability. A debt restructure would have implied losses for the bankers on their Greek debt holdings.Keen to avoid confessing to parliaments that taxpayers would have to pay again for the banks by means of unsustainable new loans, EU officials presented the Greek state’s insolvency as a problem of illiquidity, and justified the “bailout” as a case of “solidarity” with the Greeks.

To frame the cynical transfer of irretrievable private losses on to the shoulders of taxpayers as an exercise in “tough love”, record austerity was imposed on Greece, whose national income, in turn – from which new and old debts had to be repaid – diminished by more than a quarter. It takes the mathematical expertise of a smart eight-year-old to know that this process could not end well.

Once the sordid operation was complete, Europe had automatically acquired another reason for refusing to discuss debt restructuring: it would now hit the pockets of European citizens! And so increasing doses of austerity were administered while the debt grew larger, forcing creditors to extend more loans in exchange for even more austerity.

Our government was elected on a mandate to end this doom loop; to demand debt restructuring and an end to crippling austerity. Negotiations have reached their much publicised impasse for a simple reason: our creditors continue to rule out any tangible debt restructuring while insisting that our unpayable debt be repaid “parametrically” by the weakest of Greeks, their children and their grandchildren.

In my first week as minister for finance I was visited by Jeroen Dijsselbloem, president of the Eurogroup (the eurozone finance ministers), who put a stark choice to me: accept the bailout’s “logic” and drop any demands for debt restructuring or your loan agreement will “crash” – the unsaid repercussion being that Greece’s banks would be boarded up.

Five months of negotiations ensued under conditions of monetary asphyxiation and an induced bank-run supervised and administered by the European Central Bank. The writing was on the wall: unless we capitulated, we would soon be facing capital controls, quasi-functioning cash machines, a prolonged bank holiday and, ultimately, Grexit.

The threat of Grexit has had a brief rollercoaster of a history. In 2010 it put the fear of God in financiers’ hearts and minds as their banks were replete with Greek debt. Even in 2012, when Germany’s finance minister, Wolfgang Schäuble, decided that Grexit’s costs were a worthwhile “investment” as a way of disciplining France et al, the prospect continued to scare the living daylights out of almost everyone else.

By the time Syriza won power last January, and as if to confirm our claim that the “bailouts” had nothing to do with rescuing Greece (and everything to do with ringfencing northern Europe), a large majority within the Eurogroup – under the tutelage of Schäuble – had adopted Grexit either as their preferred outcome or weapon of choice against our government.

Greeks, rightly, shiver at the thought of amputation from monetary union. Exiting a common currency is nothing like severing a peg, as Britain did in 1992, when Norman Lamont famously sang in the shower the morning sterling quit the European exchange rate mechanism (ERM). Alas, Greece does not have a currency whose peg with the euro can be cut. It has the euro – a foreign currency fully administered by a creditor inimical to restructuring our nation’s unsustainable debt.

To exit, we would have to create a new currency from scratch. In occupied Iraq, the introduction of new paper money took almost a year, 20 or so Boeing 747s, the mobilisation of the US military’s might, three printing firms and hundreds of trucks. In the absence of such support, Grexit would be the equivalent of announcing a large devaluation more than 18 months in advance: a recipe for liquidating all Greek capital stock and transferring it abroad by any means available.

With Grexit reinforcing the ECB-induced bank run, our attempts to put debt restructuring back on the negotiating table fell on deaf ears. Time and again we were told that this was a matter for an unspecified future that would follow the “programme’s successful completion” – a stupendous Catch-22 since the “programme” could never succeed without a debt restructure.

This weekend brings the climax of the talks as Euclid Tsakalotos, my successor, strives, again, to put the horse before the cart – to convince a hostile Eurogroup that debt restructuring is a prerequisite of success for reforming Greece, not an ex-post reward for it. Why is this so hard to get across? I see three reasons.

One is that institutional inertia is hard to beat. A second, that unsustainable debt gives creditors immense power over debtors – and power, as we know, corrupts even the finest. But it is the third which seems to me more pertinent and, indeed, more interesting.

The euro is a hybrid of a fixed exchange-rate regime, like the 1980s ERM, or the 1930s gold standard, and a state currency. The former relies on the fear of expulsion to hold together, while state money involves mechanisms for recycling surpluses between member states (for instance, a federal budget, common bonds). The eurozone falls between these stools – it is more than an exchange-rate regime and less than a state.

And there’s the rub. After the crisis of 2008/9, Europe didn’t know how to respond. Should it prepare the ground for at least one expulsion (that is, Grexit) to strengthen discipline? Or move to a federation? So far it has done neither, its existentialist angst forever rising. Schäuble is convinced that as things stand, he needs a Grexit to clear the air, one way or another. Suddenly, a permanently unsustainable Greek public debt, without which the risk of Grexit would fade, has acquired a new usefulness for Schauble.

What do I mean by that? Based on months of negotiation, my conviction is that the German finance minister wants Greece to be pushed out of the single currency to put the fear of God into the French and have them accept his model of a disciplinarian eurozone.

Varoufaki is the best saving grace Greece had. Why else would the creditors want him out? They single handedly elevated his status by asking for his removal. I say, continue to stick it to them V, continue to tell like it really is and force them to see their own actions for what they really are, make them uncomfortable with themselves when they sit in a dark corner alone. They ink we don’t ‘get it’ but every time you speak up you show them you do get it, and you can run rings around them. Make them uncomfortable, make them squirm.

You are an absolute idiot…Prof. Varoufakis is the strongest link in a very weak chain in the Syriza negotiating team..He is the only one capable of refuting German and Creditors claims……..stay away from the kool aid…

What nonsense! This man was the Greek FINANCE MINISTER? His article makes is seem as though Greece had no say in the matter of receiving and spending billions upon billions of euros ! Greece had a party! The tax-collection authorities went fishing and counted on the billions from Europe to pay for the new swimming pools in the Greece’s backyards, their generous pensions at 50 years of age, and slowly the country stopped working altogether. Varoufakis’s nonsense requires Greeks to believe that they had no part in accepting massive payments of hundreds of billions of euros. . . . Dear Greece: you wanted the money and you took the money. You didn’t have to! You were greedy and lazy. You accepted the money and the terms associated with it.
Does anyone really believe that the Greeks will abide by the requirements of this most recent bail-out? I don’t think anyone believes that. Again Greece has held Europe hostage now for an additional 53 billion… and Germans, French, Spaniards, Dutch and other Europeans will have to delay their retirements until 67 years old (or older) so the Greeks can continue to party. Greeks could never be part of a genuine union with any other nations. Greece is even willing to threaten to leave NATO and cozy up to Russia. That just goes to show that Greece -and its national churches- are a poor fit for any international organization. Greece will always screw any union it is part of to gain whatever advantage it can. Sorry, but Greece is best off being a lone country, with its own currency, without international liaisons. I think under such circumstances, Greece would do fairly well –especially in the tourist industry.

Mr. Cobb, you are an idiot and a meathead!!! I resent everything you said. You are so uneducated. How is Greece holding Europe hostage??? This little tiny country is bullying Germany??? Whoa!! It’s Germany holding Greece hostage all these years. Yes, Greece should get the heck out and be alone and have her own currency! I give you credit for saying that. You should bow down mr Cobb to this little country for what’s given YOU! What has it given you??? Language, DEMOCRACY, architecture, art, history, theatre, Aristotle, Socrates, Hippocrates, and the list is ENDLESS!!!! What has your country given You?? I always will be proud of my Greek heritage. How dare you say these things! Educate yourself before putting your foot in your mouth! Meathead!!

Your comment is very ignorant. The private banks should have never loaned the money in the first place!!! They took the risk without being careful and had inevitable loses. welcome to capitalism!!! The federal paying off the debt of the private banks was a big scandal!!! It was the filthy rich that borrowed most of the money and never re-payed it. Unfortunately, the private banks got back all their money and now it has become a social problem, leaving the poor and uneducated people like you to fight amongst themselves. You are a prime example of this Germany VS. Greece feud.

Dan, instead of rhetoric and victim blaming, please re-read the article and try to understand the key points being made.

To put it simply, Greece was blackmailed into debt by a system which by all intents and purposes is set up to guarantee doom to any smaller members of the EU and hold them in a state of economic imprisonment.

If you need an even more simplistic example, it is really no different to “same day lenders” who trap the needy in a spiral of debt.

If you need someone to blame then start at the top and follow the money.

Dan I don’t know a single person with a swimming pool. In order for your gross generalizations to be correct it would only be a Greece problem, but it’s not is it? It’s Spain, Portugal, Ireland, etc. Greece is the guinea pig and the euro is a failed experiment. It was the affluent 10% that didn’t pay taxes and hid their money in Switzerland. And Goldman-Sachs and other banks increased Greece’s debt. These are all known facts. It’s unbelievable that your kind of ignorance still exists.

His reasoning is a valid one. How on earth is this allowed to happen to millions of Europeans???????????????????????
The only other explanation is that there seems to be a loathing of the Greek cultural and ethnicity. They want to wipe out the country and have no cultural left in Europe. Germany’s debt from WWII should have never been forgiven. Why do people not learn from history’s mistakes???? This is soo disgusting. Im a Greek-American and was always proud of my heritage and motherland. This just makes me sick to my stomach. I hope to live to see any inheritance that my family may have in Greece. Im sorry to say but Greece was much better of under its dictatorship. At least they had no debt.

LUX & DAN COBB… In 2 words DICK HEADS. You expect us to pay any hommage to thd views of 2 sheppards (apologies to any sheppards that may be reading this) over that of a Proffedor in Economics in one of the most Prestigious Universities in the world??? Get your hands off it, you tools!
Would you lend money to someone for the purposes of investing it into a specific purpose (e.g. building a manufacturing plant) & not check that it was bring used for what the objectives of the loan or grant was? And once you find it wasn’t, would you continue to dish out mord and more??? Unless you’re even more intelectually challenged than I already think u are, thren probably not! Then why was the EU dishing it out to Greece & pushing them further into debt without implementing effective auditing checks & balances, punitive measures for breaches etc. & withdraw funding earlier to help remedy the situation earlier b4 getting to this? One has to believe either thd EU figureheads had NO IDEA & shouldn’t therefore have been in the positions they occupied OR that they wanted Greece to be in such debt that would lead to economic disaster!! Why else would they persevere with such poor decisions on continuously dishing out the cash where there were concerns about where the $ was going? Poor strategic procurement management of stimulus $ by the EU. Why did the EU admit Greece in in the firstplace when by sll reports audits in the 90’s revealed that officially, Greece should be broke? This is partly why Varoufakis’ suggestions are credibile. Greece gad been set up sd s skapegoat & a smokescreen for the failures of the EU.

LOL man this is the biggest bullshit i have ever read. So it is the EU to blame because they gave money to greece, so they can fix their problems? HAHAHAHA The answer to your question why greece was let into the EU is, because Greece was hiding its debts with the help of U.S. banks. They were fucking lying to the EU, thats why.

I agree with you at one point tho, after the first payment 5 years ago, there sholdnt have been any more help for greece. Greece back then proove that they cant be trusted and the politicians are corrupted as fuck. They took the money and shoved it in their own pockets, instead of using it to restructure the economy and get greece out of the shit. In the end both are at fault, greece and the EU. No point in blaming only one of them.